TurboTax Business puts passive activity loss on K1s that shouldn't be there

[eloisedaddy]

Hello,

I'm using TurboTax business for the LLC that holds our rental property. We used the rental property more than 4 weeks for last year and any passive activity losses from the LLC should not be showing up on the K1s. However, they do. Does anyone know why the business losses would show up on the K1 when they shouldn't?

Thanks,

Andrew

[Anonymous_]

This is a bit difficult to comprehend, considering the other rules applicable to rental real estate, but vacation homes (used for more than the greater of 14 days or10% of the number of days during the year that the home was rented at a fair rental) are not subject to the passive activity loss rules.

See https://www.irs.gov/publications/p925#en_US_2021_publink1000104578

[eloisedaddy]

Are you implying the K1s should have the loss on them? My accountant is telling me otherwise because of the level of personal use.

[Anonymous_]

Show your accountant the link I posted.

Activities That Aren’t Passive Activities

The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental.

[eloisedaddy]

Accountant is right. You might have misread my question. We used it for personal use for 4 WEEKS. That is, 28 days. So, the K-1s that are issued to each of use as owners of the property should not report a loss in them because we're not entitled to it under the tax laws. None the less, the loss is in the K-1s. 

[Critter-3]

The passive loss may be limited on the PERSONAL tax return ... on the partnership/S-corp return the information is pass thru to the partner/owner via the K-1 form.   

[Anonymous_]

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@eloisedaddy wrote:

We used it for personal use for 4 WEEKS. That is, 28 days.

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How many days was the property rented at fair rental value?

Read the rule again: It is more than the greater of 14 days or 10% of the number of days the home was rented at a fair rental.

Thus if, for example, if you had 100 days at fair rental and 28 days of personal use, that would mean your rental is not a passive activity.

[eloisedaddy]

Yup. Checked that. Personal use won. It was a outlier year because we used the place more during COVID. Others are correct, it all gets caught on the personal return, but TurboTax really shouldn’t be putting it in the K-1s and I wish I knew where the flag was to stop that (or what I did wrong that leads the program to think it’s ok). 

[Anonymous_]

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@eloisedaddy wrote:

Yup. Checked that. Personal use won. It was a outlier year because we used the place more during COVID. Others are correct, it all gets caught on the personal return.........

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It "gets caught on the personal return" because you are entering the information from a K-1 (as a net rental real estate loss) rather than entering the information for the property in the Rental Properties section of the program.

Again, your rental is not a passive activity and losses (directly related to fair rental days) are not limited. If you want to test this out, enter the income and expenses in the Rental Properties section of the program. 

[Anonymous_]

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@eloisedaddy wrote:

 Others are correct,

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No, others are not correct. Read the link I posted again. What is it you do not understand?

[eloisedaddy]

I believe it’s the the personal use rule that is the issue here. When personal use exceeds the 14 day threshold the property is considered a residence and the individual filer cannot claim the loss - passive or active. The loss is capped to the revenue collected. Your point is understood as related to a passive activity, but my understanding is that there is another rule at play here.

[Anonymous_]

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@eloisedaddy wrote:

When personal use exceeds the 14 day threshold the property is considered a residence.....

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Correct: when the personal use exceeds the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental.

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@eloisedaddy wrote:

.....and the individual filer cannot claim the loss - passive or active. The loss is capped to the revenue collected.

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Incorrect. If the expense is directly related to rental use and the net result is a loss, then the loss is not capped.

Here's an example (you can try this one yourself) that is extremely oversimplistic (and perhaps unrealistic but it illustrates my point):

Personal use = 30 days - Fair rental = 200 days. [personal days exceed 10% of the rental days]

Rental income = $10,000

Commissions = $2,000

Repairs during rental period = $5,000

Advertising = $2,000

Travel = $2,000

Net loss = ($1,000) which is nonpassive and 100% deductible from all other income.